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Special Order and Pricing Decisions

You are the divisional controller of the US division of Samtech Electronics. Your division is operating at capacity. The Australian division has asked the US division to supply a sound system (chip and speaker), which it will use in a new model Game Box that it is introducing. The US division currently sells an identical sound system to outside customers for $11.00 each. The Australian division offered to pay $7.00 for each sound system. The total cost is...

Purchased Parts from outside vendors_______$28.10
Sound system from US Division____________$7.00
Other variable costs______________________$17.50
Fixed overhead__________________________$10.00
Total___________________________________$62.60

Game Box is as follows:

The Australian division is operating at 50% of capacity and this Game Box is an important new product introduction to increase its use of capacity. Based on a target costing approach, the Australian division management has decided that paying more than $7.00 for the sound system would make production of the Game Box infeasible because the predicted selling price for the Game Box is only $62.00.

Samtech Electronics evaluates divisional managers on the basis of pretax ROI and dollar profits compared to the budget. Ignore taxes and tariffs.

1. As divisional controller of the US division, would you recommend supplying the sound system to the Australian division for $7.00? Why or why not?

2. Would it be to the short run economic advantage of Samtech Electronics for the US Division to supply the sound system to the Australian division? Explain your answer.

3. Discuss the organizational and behavioral difficulties, if any in this inherent situation. As the US Division controller would you advise the Samtech Electronics President to do in this situation?

Solution Preview

Please find your solution attached.

1. As divisional controller of the US division, would you recommend supplying the sound system to the Australian division for $7.00? Why or why not?

Since the US division is already operating at full capacity it is not feasible for them to undertake the production of the sound system for the Australian division at a price that is less than the price it is usually sold for. To do so would require that the US division give up some of its current sales to regular customers at $11.00 per unit in order to sell the product at a lower price of $7.00 per unit. This does not make good business sense and will surely reduce the profits of the division and the firm as a whole.

If the US division had excess capacity it may have been a wise decision to produce ...

Solution Summary

A look at a case scenario involving a decision to sell a product on a short-term basis for a price less than the usual price. The student gets an opportunity to see how such situations are handled. The many factors that must be considered when dealing with this type of case are handled in detail.

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